prev

Poll of the Day Recap: 77% voted they disagreed with Goldman Sachs Bearish Call on Gold

Goldman Sachs grabbed headlines yesterday, sticking with its view that gold will be lower by the end of December as the economy improves.  In today’s Morning Newsletter, Hedgeye CEO Keith McCullough spelled out exactly why we are taking the other side of GS and sticking with our bullish call on gold.

 

We maintain that  #InflationAccelerating will continue to weigh on consumers and a growth miss will warrant easier policy on the margin.

 

CLICK HERE for more on why you should stay long gold with Macro Analyst Ben Ryan.

 

In  today’s poll we asked: Do you agree with Goldman Sachs’ bearish call on gold?

 

At the time of this post, 77% voted they disagreed with GS, 23% agreed with GS bearish call on gold.

 



VIDEO | Ignore Goldman Sachs, Stay Long Gold $GLD

Macro Analyst Ben Ryan discusses why Hedgeye remains bullish on gold despite recent news that Goldman Sachs has reiterated its bearish call. He speaks with Director of Research Daryl Jones.


TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?”

Takeaway: Recent data supports our expectation that inflation will quash US consumption growth, while developing quant signals challenge that view.

Each day one of our summer interns, Kevin Brooke – the offspring of Yale Hockey legend Bob Brooke – compiles a blog run for our team. The purpose of the blog is find insightful macroeconomic or financial market analyses that challenge (or support) our existing macro themes, as well as those thought pieces that are generally informative.

 

Today Kevin hit a home run with two of the better pieces I’ve seen in recent weeks:

 

  • Commodities Reverse Their Gains!: CLICK HERE to access the article
  • Here’s Why Americans Are Having a Lot Less Fun This Summer: CLICK HERE to access the article

 

In discussing the latter data point first, we are most welcoming of this incremental evidence of our #ConsumerSlowing theme, as it shows a net percentage of Americans are spending more on Groceries (49%), Gas/Fuel (46%) and Utilities (35%). Per the cited Gallup Survey, those expenditure categories were the three largest in terms of the net percentage of Americans feeling the effects of cost-push inflation.

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - 1

 

Interestingly enough, those three expenditure categories just so happen to be the three inputs to our Hedgeye Macro Consumer Squeeze Index, which continues to show #InflationAccelerating eroding domestic purchasing power.

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - CONSUMER SQUEEZE INDEX

 

On a prospective basis, we obviously need to see incremental commodity price appreciation in order for cost-push inflation to threaten the outlook for consumer spending in a material way (a la 2008 or 2011).

 

One key driver of our forecast for said price appreciation is #DollarDevaluation. Specifically, we think the Fed is gearing up to surprise investors by introducing directionally-dovish monetary policy, at the margins, as we progress through the back half of the year. Refer to the following pieces to review that thesis in full:

 

 

Today in the Federal Reserve’s Semiannual Monetary Policy Report to the Congress, FOMC Chairwoman Janet Yellen continued to “connect the dots” on an outlook for easier monetary policy:

 

  • “The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”
  • “Although the economy continues to improve, the recovery is not yet complete. Even with the recent declines, the unemployment rate remains above Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level. Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation.”
  • “Although the decline in GDP in the first quarter led to some downgrading of our growth projections for this year, I and other FOMC participants continue to anticipate that economic activity will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth… As always, considerable uncertainty surrounds our projections for economic growth, unemployment, and inflation. FOMC participants currently judge these risks to be nearly balanced but to warrant monitoring in the months ahead.”
  • “Of course, the outlook for the economy and financial markets is never certain, and now is no exception. Therefore, the Committee's decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”
  • “In sum, since the February Monetary Policy Report, further important progress has been made in restoring the economy to health and in strengthening the financial system. Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed. The Federal Reserve remains committed to employing all of its resources and tools to achieve its macroeconomic objectives and to foster a stronger and more resilient financial system.”

 

If you’ve subscribed to our research for longer than one day, you’ll no doubt have realized that quantitative, market-based signals tend to front-run our interpretation of or expectations for underlying fundamentals, while our those same underlying fundamentals help instruct our outlook for market prices. It’s a dynamic, reflexive process that tends to generate “Circular Reference Warnings” among the linear, Consensus Macro forecasting community.

 

Right now, those quantitative signals aren’t as supportive as they were even 2-3 weeks ago. Looking to our Tactical Asset Class Rotation Model (TACRM for short), we’re seeing a SELL signal in FX for the first time since late APR and the third-consecutive week with a SELL signal in Commodities, after having been squarely in BUY territory since mid-FEB.

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - TACRM Summary Table

 

Refer to the following presentation for more insight into TACRM’s quantitative signaling capabilities: http://docs.hedgeye.com/HE_TACRM_2014.pdf.

 

It’s worth noting that TACRM’s BUY and SELL signals aren’t necessarily meant to generate absolute returns (although the backtest data on slides 15-20 of the aforementioned presentation suggests TACRM is quite good at doing just that); rather, these signals are relative to the other asset classes (e.g. BUY Fixed Income & Yield Chasing in lieu of XYZ asset class, which would have a commensurate SELL signal).

 

Additionally, it’s also worth noting that within our hierarchy of quantitative risk management signals, TACRM sits squarely below Keith’s multi-factor, multi-duration model that is core to each of our fundamental views. Regarding those signals, the key levels to watch are:

 

  • WTI Crude Oil: we need to see it hold sustainably below these levels in the coming weeks for us to consider materially altering our economic outlook
    • Threatening Bearish TREND = 101.89
    • Threatening Bearish TAIL = 100.27
  • CRB Index: we need to see a sustained breakdown below the TREND line for us to consider materially altering our economic outlook
    • Threatening Bearish TREND = 297
    • Squarely Bullish TAIL = 291
  • Gold: we need to see a sustained breakdown below the TREND line for us to consider materially altering our economic outlook
    • Squarely Bullish TREND = 1281
    • Squarely Bearish TAIL = 1324
  • USD Index: we need to see a sustained breakout above these levels line for us to consider materially altering our economic outlook
    • Squarely Bearish TREND = 80.71
    • Squarely Bearish TAIL = 81.19

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - CRUDE OIL

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - CRB INDEX

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - GOLD

 

TACRM ASKS: “CONSUMER SQUEEZE OR CONSUMER SNEEZE?” - US DOLLAR INDEX

 

Our process is dynamic and, if nothing else, mentally flexible. We aren’t wed to any thesis, so if the facts change (i.e. commodity inflation reverses and the Fed is supportive of a stronger USD),  we’ll change with them.

 

Hope this is helpful and thanks for the questions,

 

DD

 

Darius Dale

Associate: Macro Team


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

LO: Removing Lorillard from Investing Ideas

Takeaway: We are removing Lorillard (LO) from Hedgeye's high-conviction stock idea list.

We are removing long Lorillard (LO) from Investing Ideas today. 

 

After Consumer Stables analyst Matt Hedrick added LO on 3/6/14 and months of rumors that it would be taken out, this morning Reynolds American (RAI) announced its intention to buy LO in a cash-and-stock transaction currently valued at $68.88, or a total of $27.4B (including debt). 

 

LO: Removing Lorillard from Investing Ideas - 79

 

The price is significantly below our share target of $80, and it’s worth noting that there is significant runway before the deal is expected to close in 1H 2015. That said, this has been a fantastic position for us. 

 

We want to underline that beyond RAI we do not see another competitive bidder for LO. Further, given that we expect a lengthy regulatory approval process on anti-trust considerations this deal is still a long way from closed and may present a further investment opportunity.

 

Shares are up over 15% from where we added it to Investing Ideas.


SINGAPORE: MALIGNANT MACRO

Rigorous statistical analysis suggests that Singapore’s weakening macro environment could impact casino revenues.

 

 

THE CALL TO ACTION

We’ve found several macroeconomic metrics to be correlated with Singapore gaming revenues.  Given the few number of data points – Singapore is still a young but mature gaming market – it is too early to quantify each metric’s significance.  Considering the discretionary and cyclical nature of mature gaming markets worldwide, LVS and Genting Singapore investors should be worried about Singapore's deteriorating macro environment.

 

THE MACRO SETUP

The Singapore government recently released a slew of macroeconomic data for Q2 and it’s difficult to find any ray of positivity.  Q2 GDP contracted (QoQ) for the 1st time in 7 quarters.  Retail sales (ex motor vehicles) are trending -2% YoY (April-May period).  Watches/jewelry sales (seasonally adjusted) fell 8% (April-May period).  On the housing side, Singapore private residential prices fell again in Q2 following the Q1 decline.  The results are even more extreme for Singapore new private home sales which fell 68% in the month of June.  CPI also ticked up in Q2 relative to Q1.

 

The Singapore Dollar remains higher versus a majority of its cross currencies in Q2.  As Genting mentioned several times on its conference call, a stronger Singapore dollar is a headwind for the mass business due to a lower bet per trip.

 

SINGAPORE: MALIGNANT MACRO - ss

 

HEDGEYE ANALYSIS

We’ve run the regressions and the only thing we’ve definitively concluded is that there is not enough revenue data points to formulate a working model.  However, we can derive a very high R square using multiple macro variables even though the t-stats (measuring statistical significance) among individual variables are mostly fairly weak.  Again the low t-stats are more of a function of a limited dataset. 

 

Among the most statistically significant and positively correlated variables are private residential prices, visitation, and watch/jewelry sales.  Negatively correlated variables include CPI and currency.  Unfortunately, none of these variables are moving the right way to support casino revenue growth.  Fortunately, all of these data points, with the exception of visitation, are released on a timely basis.

 

CONCLUSION

We will understand the statistical impact macro has on gaming revenues as more quarters pass.  However, our view is that the deteriorating macro environment, as evidenced by variables that we believe will prove to be significant, is negatively impacting casino play at the Singapore casinos.

 

For LVS, we are projecting Q2 Marina Bay Sands (MBS) EBITDA of $378 million, which assumes a normal hold percentage, versus the Street at $390 million.  Given the macro weakness, we feel less certain in our Q2 and 2014 MBS EBITDA estimates.


Cartoon of the Day: Hedgeye Gold Bulls vs. Goldman Bears

Takeaway: Goldman doesn't like Gold. We do.

Cartoon of the Day: Hedgeye Gold Bulls vs. Goldman Bears - Gold cartoon 07.15.2014


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next